This article is an excerpt from the Shortform book guide to "The Sovereign Individual" by James Dale Davidson and Lord William Rees-Mogg. Shortform has the world's best summaries and analyses of books you should be reading.
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How does technology shape society? How major has the transition to the information age been?
In the 1990s, James Davidson and William Rees-Mogg predicted that “sovereign individuals” would be the future. They discuss this prediction and others about society and the economy in their book The Sovereign Individual: Mastering the Transition to the Information Age.
Continue reading for an overview of this prescient book.
Overview of The Sovereign Individual
Writing in the 1990s, venture capitalist James Davidson and banker and journalist William Rees-Mogg predicted that the first quarter of the 21st century would bring sweeping changes to the global economy and the very structure of human civilization. In their book The Sovereign Individual: Mastering the Transition to the Information Age, they explain both their predictions and the rationale behind them. One of their most significant predictions is that nations will fragment into millions of city-states and even individual estates with sovereign-nation status. The owners of these sovereign estates are the “sovereign individuals” from whom the book draws its title.
(Shortform note: The word “sovereign” in this context means “having governmental authority,” such as the power to make or enforce laws, levy taxes, fight wars, and make treaties with other sovereign states or entities.)
Davidson and Rees-Mogg base their predictions on what they call “megapolitics,” the theory that forms of government and economies are dictated mostly by circumstances, such as climate and the resources that are available. In this case, they argue that information technology is rapidly making new resources available to people in ways that will inevitably change how they relate to each other politically and economically.
We’ll first consider the authors’ explanation of megapolitics. Then we’ll look at their assumptions and predictions about the technological resources that would become available after the turn of the 21st century. That will put us in a position to understand and discuss their predictions for the future, particularly the rise of sovereign individuals.
Megapolitics: How the Economics of Force Shape Civilization
Davidson and Rees-Mogg contend that civilizations throughout history have been shaped mostly by their circumstances, including environmental factors like climate and technological developments that create new ways of doing things. Thus, if you can understand how circumstances are changing, you can predict how society will change. This is the basis of their predictions for the rise of sovereign individuals and other changes in the 21st century.
According to Davidson and Rees-Mogg, the circumstances that dictate how people can make the most money impact society the most. This is because most people tend to do whatever they think will enable them to accumulate the most wealth. So if circumstances change, creating a new way of earning money or changing which businesses are most profitable, society will change too, as people adapt their behavior to increase their wealth.
Circumstances that affect the armed forces (such as weapons technology) are also highly significant in shaping society. And factors that affect the armed forces also affect wealth, because armed forces are used either to protect wealth or to obtain it by force. In the authors’ view, taking wealth by force includes taxation, as well as armed robbery, protection rackets, extortion, and so on.
Thus, if military technology and other relevant circumstances give large armies a decisive advantage over smaller forces, then civilizations will tend to coalesce into large nations that can field large armies. Similarly, if large businesses are more profitable because technology and circumstances dictate large economies of scale, then big businesses will become the norm as they out-compete smaller businesses. This was the case during the industrial age, which Davidson and Rees-Mogg identify as the period from AD 1500 to 2000.
But, if different technology or different circumstances make small businesses more profitable than larger ones, then big businesses will tend to fail or fragment while small ones take over the market. Similarly, if small armed bands can contend effectively with larger forces that take more resources to maintain, then sovereign states will tend to be small. Large nations, if they exist at all, will be more like loose coalitions of smaller sovereign entities. The authors contend that this was the case during the medieval period (which they identify as AD 1000 to 1500).
They also believe that new and soon-to-be-available technologies are changing circumstances to favor smaller entities again—both economically and militarily. This is why they expect that many nations will fragment into smaller sovereignties in the 21st century.
Technological Assumptions
Now that we’ve covered the basics of how circumstances and technological developments shape societies, we’ll take a look at the specific technologies Davidson and Rees-Mogg expect will transform society in the 21st century. Writing in the 1990s, they expected all these developments to take place by 2025.
The Virtual Economy
Davidson and Rees-Mogg predicted that commerce and financial assets would increasingly migrate from localized physical economies into the online virtual economy. Furthermore, the online economy would be largely beyond governments’ ability to tax or otherwise regulate, for three reasons.
First, assets and businesses that exist in cyberspace aren’t tied to any particular location. This means that no nation really has jurisdiction over them, because governments (as we know them) exercise authority over areas with well-defined geographical boundaries. If you’re running a business that’s all online, and the government tries to interfere with your business, you can just move to a different jurisdiction where they won’t bother you.
Second, the authors expect that encryption technology will make online transactions completely private—no one except the parties involved in the transaction would know who did business with whom or how much money changed hands. This would make reporting your income from online transactions strictly voluntary since there’s no way the government can find out about it unless you tell them.
Third, Davidson and Rees-Mogg expect that online transactions will increasingly be conducted with digital currencies, rather than fiat currencies that are controlled by national governments. They envision these digital currencies as encrypted receipts for gold or other commodities with stable value. They would be issued by a new breed of banks whose business is all online and whose infrastructure is distributed across many locations in many different countries. Again, this would put them largely beyond the reach of tax authorities or other government regulators, because if any one of their locations was threatened with regulation, they would simply close it.
Collectively, these changes will give small, mobile businesses and individuals a competitive edge over large companies that are heavily invested in physical infrastructure. This is because their immobile infrastructure makes them vulnerable to taxation and other regulations that online-only businesses can easily avoid.
Computerized Warfare
Davidson and Rees-Mogg also predict that military operations will increasingly take place in cyberspace. There are two dimensions to online warfare: First, as valuable businesses and financial assets migrate from the physical world to the online economy, they present a target for hackers—the soldiers and warlords of cyberspace.
Second, as physical infrastructure becomes increasingly computerized, it, too, becomes vulnerable to hackers. Instead of torpedoing a battleship, you could hack into its computerized control systems and shut it down, or even make it self-destruct.
The transition from physical war to cyberwar will diminish the significance of army size in deciding the outcome of wars. This tends to favor smaller nations, or at least removes the military advantage that larger countries have had.
High-Powered Virtual Assistants
Finally, Davidson and Rees-Mogg expect that virtual assistants (bots, algorithms, and AIs) will replace many professional workers, such as lawyers, doctors, and administrative assistants. These virtual assistants will greatly increase your individual capacity for getting things done because they will work tirelessly on your behalf without wages or living expenses and with unswerving loyalty.
They could also be weaponized as a deterrent to people who might wish to harm you or take your wealth: If you have an army of virtual detectives and virtual hackers that are programmed to perform investigations on your behalf and launch a cyberwar against anyone they find to have wronged you, that gives people an incentive not to wrong you. And your virtual assistants will continue to function after your death, so if someone murdered you, your AI would avenge your death. Again, this knowledge will act as a deterrent to would-be murderers.
By acting as force multipliers, AI virtual assistants will enable individuals and small, efficient organizations to do as much work as larger, less-efficient organizations. This will give small businesses higher profit margins than large corporations. For that matter, it will also make small, efficient security forces a match for large national armies.
Predicted Changes
Davidson and Rees-Mogg believe that the technological developments we just discussed will have a profound impact on social structures in the 21st century. As circumstances change to favor small, efficient organizations over large ones, both economically and militarily, they expect nation-states and national governments to decline and ultimately disappear. Nations will be replaced by millions of city-states and sovereign individuals. During the transition, they also anticipate a general increase in crime and violence throughout the world. We’ll break down the reasoning behind each of these predictions in turn.
The Decline of Nations
After the end of the medieval era, feudal monarchs disappeared because new technology gave nation-states an economic and military advantage over them. Davidson and Rees-Mogg assert that nation-states will soon disappear in the same way, and for the same reasons, as new technology renders them economically unsustainable and makes their military power irrelevant.
Economic Insolvency
We’ve already discussed how Davidson and Rees-Mogg expect economic activity to migrate from local and national markets that governments can tax and regulate to encrypted online markets that are beyond government control. If this migration makes paying taxes largely voluntary, most national governments stand to lose their largest source of income.
This is a serious problem because, as Davidson and Rees-Mogg point out, most national governments are already deeply in debt. They attribute government debt largely to the welfare-state mentality, whereby the government is expected to levy disproportionately high taxes on the rich, distribute some of the money taken from the rich to the poor, and fund extensive public works. The cost of welfare projects already exceeds tax revenues, forcing governments to endlessly borrow money.
And the situation is only going to get worse for welfare states. Not only will the online economy allow people—especially wealthy people, who pay most of the taxes in developed countries—to avoid paying taxes, but the authors also expect the income gap between rich and poor to increase significantly in most countries.
The reason for increasing income inequality is that virtual assistants will enable a smaller number of highly skilled people to do a much larger fraction of the work. As conditions increasingly favor small, efficient companies, there will be a push to increase efficiency throughout the economy. This will result in the elimination of many bureaucratic or otherwise unproductive positions, and compensation will increasingly be based on output, rather than hours worked. Jobs for which you get paid just for showing up will disappear. As such, exceptionally productive people will see their incomes rise, while everyone else sees a loss of income.
So the rich will get richer, the poor will get poorer, and a larger fraction of the population will be poor. This will make welfare programs increasingly infeasible, as the number of eligible recipients skyrockets while most of the funding disappears. And governments won’t even be able to soften the blow by printing more money and inflating their currency, because fiat currencies will become worthless as the online economy switches over to private digital currencies.
Military Obsolescence
As we noted earlier, Davidson and Rees-Mogg expect warfare to become increasingly computerized, which will diminish the significance of traditional military size and firepower. This, too, will contribute to the decline of nation-states, because a nation’s sovereignty is ultimately based on its ability to defend itself against other nations.
Today’s nations rely on standing armies and physical weapons for national defense. But the authors expect that online communities and even highly skilled individuals (aided, of course, by their virtual assistants) will soon be capable of waging cyberwar just as effectively as today’s most powerful nations.
The Rise of Micro-Sovereignties
The authors contend that as nation-states decline in the 21st century, millions of micro-sovereignties will rise to take their place. These could be city-states or even individual estates where a wealthy person gets to decide what laws apply to her own property.
These small communities of high-productivity individuals will be much more economically efficient than today’s welfare states. And as conventional warfare is replaced with cyberwar, they will be just as capable of asserting and defending themselves as today’s sovereign nations.
That said, Davidson and Rees-Mogg expect that most micro-sovereignties will be formed by mutual agreement on terms of secession, rather than by revolution and military force. As national governments become increasingly bankrupt and incomes become increasingly difficult to tax, the option of selling or leasing sovereignty to individuals or other entities will become increasingly attractive. Eventually, today’s national governments will sell off or lease out practically all of the territory over which they currently exercise sovereign control.
The authors explain that once this has taken place, there will be at least three types of micro-sovereignties.
Competitive City-States
Many micro-sovereignties will be city-states or regional governments that compete for citizens the way businesses compete for customers. Basically, they will be service providers that provide the kind of infrastructure and protective services currently provided by governments. Each micro-sovereignty will probably cater to a unique set of preferences to differentiate itself from its competitors.
Most of them will probably charge their residents a flat annual fee rather than trying to tax incomes, for two reasons: First, flat rates will be more competitive, because residents will compare the cost and benefits of living in different micro-sovereignties and choose the ones that offer the best value. Second, as we’ve discussed, encryption technology will make it virtually impossible for governments to keep track of individuals’ incomes anyway.
Sovereign Individuals
Other micro-sovereignties will be individual estates of the wealthiest and most productive individuals. As technology puts them in a position to defend themselves and their assets from crime and military aggression better than any government can, they will find it cheaper to assert their own sovereignty, rather than live by the terms of another sovereign entity and pay for protection through taxes. As such, they, too, will purchase or lease sovereign control of their own property.
Cyber-States
Some online communities may exercise powers similar to those of a sovereign state without controlling any physical territory.
Transitional Violence
Davidson and Rees-Mogg hope that the era of micro-sovereignties will ultimately be one of greater peace and individual freedom than the era of nation-states has been. As we’ve discussed, they also expect most micro-sovereignties to be born out of peaceful treaties rather than violent revolutions. But they warn that during the period of transition from nation-states to micro-sovereignties, there will likely be an increase in crime, terrorism, and other acts of violence throughout the world.
This is because one of the functions of government is to deter crime by providing law enforcement services. As national governments fall apart, law enforcement services will break down, removing this deterrent to crime.
Meanwhile, a lack of funding will oblige welfare programs in welfare states to reduce or suspend benefits at a time when many people will see their real income decreasing. The authors expect low-skilled office workers to take the largest loss: Many of them hold positions that provide comfortable middle-class income, but they will be replaced by virtual assistants.
Some of these people may become desperate enough to turn to crime as an alternate source of income. Others may resent the social and technological developments that cost them their livelihood enough to engage in terrorism or violent protests.
And, still other people will see the social and governmental transitions as something that must be resisted to preserve nations as a matter of principle. The authors assert that national identities are somewhat arbitrary, but are still an object of loyalty for many people. So nationalist ideology will also drive opposition to change, and some of the opposition will likely rise to the level of terrorism or paramilitary aggression.
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Here's what you'll find in our full The Sovereign Individual summary:
- 1990s predictions on what the 21st-century economy would be like
- The idea that nations will eventually fragment into sovereign city-states
- The growth of cyber economies, computerized warfare, and virtual assistants
